ANALYSIS: North Atlantic joint ventures continue to evolve

20 August, 2013

SOURCE: Air Transport Intelligence news

BY: Edward Russell

Washington DC

Delta Air Lines broke with North Atlantic joint-venture convention with its recent acquisition of a 49% stake in Virgin Atlantic from Singapore Airlines. The move was a precursor to a new immunised joint venture between the UK and USA, and - Delta hopes - an even greater share of the lucrative market.

"This is quite bold and quite new," says Craig Jenks, president of consultancy Airline/Aviation Projects. "In the whole history of North Atlantic alliances and joint ventures, this is much bolder than anything else we've seen."

The deal is the first in which a US carrier has taken a significant equity stake in a European carrier, as Delta and Virgin point out in their joint application for antitrust immunity to the US Department of Transportation. It is also the first such transaction that includes a metal-neutral immunised alliance.

Lufthansa Group's purchase of a 16% stake in JetBlue Airways for about $300 million in 2007 and British Airways' investment of about $400 million for a 24.6% stake in then USAir (now US Airways) in 1994 included codeshares and, in the case of the latter, a joint marketing agreement, but neither went as far as the Delta and Virgin deal.

The new partnership is off to a strong start. Ed Bastian, president of Atlanta-based Delta, said in July that a codeshare between the carriers had generated $8 million in joint sales during its first three weeks and that it anticipated further revenue and yield improvements once the joint venture is in place.

The carriers plan to launch their alliance by 1 January 2014, subject to receiving anti-trust immunity, according to Bastian. They have already implemented a codeshare covering 108 international routes, as well as reciprocal frequent-flyer and lounge member benefits.

Not all matters related to the planned alliance are resolved.

Connections at New York JFK and London Heathrow could be hampered by notably long processing times for arriving international passengers in JFK terminal 4 - where the majority of flights on Delta and Virgin arrive and depart - and the carriers' scattered operations in terminals 1, 3 and 4 at Heathrow.

Wayne Aaron, senior vice-president for alliances and partner development at Delta, says that they are in discussions with airport operator Heathrow Airports Holdings about what options are available to consolidate their joint operations and adds that their goal is to "find the best way to co-locate at any airport we serve".

The fact that Virgin is not a member of SkyTeam like Delta, is another unresolved matter. The carrier has said that it would consider membership in the future, but has no plans to join at the current time.

The airlines' tie-up marks the inclusion of the largest remaining unaligned segment of capacity across the North Atlantic in an immunised alliance. This will bring the share of transatlantic capacity included in a joint venture to about 75% of the market, based on Flightglobal/Innovata data for September.

Looking further out, the merger of US Airways and American Airlines, if it succeeds in its fight against a US Justice Department challenge to the deal, would mean the next largest available share of transatlantic capacity joining a metal-neutral alliance and result in nearly 80% of capacity in the market being covered by one of the joint ventures, Flightglobal/Innovata shows.

Should this happen then nearly 80% of transatlantic capacity would be priced and marketed by essentially only three players: American, British Airways, Finnair and Iberia; Delta, Air France, Alitalia, KLM and Virgin Atlantic (the Delta-Virgin Atlantic joint venture will be separate from the existing partnership, but all five parties will co-ordinate on traffic flows in the market); and United Airlines, Air Canada and Lufthansa.

Yet these changes are being accepted by the industry.

"Despite these moves by Delta and Virgin, we are confident that American and its joint business partners will continue to offer customers the most attractive products and services and most compelling value proposition across the transatlantic [route]," says Kurt Stache, vice-president of strategic alliances at American.

American and its joint-venture partners will see their share jump to a little more than 24% from nearly 20% once US Airways is included, based on Flightglobal/Innovata's September ASK data.

By comparison, Delta's existing joint venture has a 23% share across the North Atlantic, according to Flightglobal/Innovata data. While its alliance with Virgin will be separate from that, its two joint ventures together will have more than a 28% share.

"Obviously the [Delta-Virgin Atlantic] deal will strengthen Delta but, when we look at our relative strength across the Atlantic, we feel very good about it," says Star Alliance chief executive Mark Schwab. Star includes the existing Air Canada, Lufthansa and United alliance, which has a market share of nearly 27%, according to Flightglobal/Innovata.

On the impending departure of US Airways Schwab says: "We strongly believe that fair competition among alliances - strong, high-quality and running sustainable businesses - is in the best interest of both global and national economies."

Capacity across the Atlantic remains relatively flat, with airlines remaining disciplined, continuing a multi-year trend. Flightglobal/Innovata data shows that there are 25.7 million ASKs scheduled in September, which is up by 1.2% compared to 2012 but down by about 1% since 2011.

Airlines are praising this trend. "We've right-sized our footprint in Europe over the last several quarters, and the improvement in our transatlantic unit revenue results this quarter illustrates the benefit of capacity discipline," said James Compton, chief revenue officer at United, in July.

United saw passenger unit revenues rise by 6.1% while it cut capacity by 1.3% across the Atlantic during the second quarter, compared to a year earlier.

Passenger unit revenues in the market improved by 6.8% at American, 1.4% at Delta and 4% at US Airways during the three months ending in June versus 2012. The US Airways gain even occurred as the Arizona-based carrier bucked the trend by increasing capacity by 5% during the period.

"We've had great results from getting actual corporate accounts in Europe signed up," said Scott Kirby, president of US Airways, in July. "We historically haven't done that as aggressively three or four years ago."

Jenks says that capacity discipline across the Atlantic is likely to stay, especially as an increasing share of capacity in the market is covered by metal-neutral joint ventures.

"We're in the early part of an upturn, if [history] repeats itself in a 10-year cycle," he says. "The early upturn period is one of retrenchment. It's an environment where growth is not the answer."

The addition of flights by Gulf carriers or a new long-haul, low-cost carrier could upset the market, says Jenks. Emirates plans to launch flights between Milan and New York from 1 October, and it recently came to light that the carrier has the authority to fly between the UK and USA, if it chooses to do so.

Ryanair chief Michael O'Leary said at the Paris air show in June that he "would love to do a transatlantic low-fare airline", although he tempered his remarks by adding that he does not see an opportunity in the market until the "backlog of deliveries on the long-haul aircraft is worked through - both by Airbus and Boeing".

The addition of either Emirates or an O'Leary-run low-cost carrier would certainly change the dynamic across the North Atlantic. Additional capacity and lower fares alone could reverse the unit revenue gains that airlines are reporting, not to mention the greater variation in product competition.

"The North Atlantic is the most competitive international market in the world," says Schwab. It is this undeniable fact that keeps airlines on their toes and in constant search for the value proposition that will give them the strongest position in the market - as the Delta-Virgin deal and, to a lesser degree, the potential US Airways-American merger should it still happen, indicate.